The United States of America’s budget has hit a huge $1.8 trillion figure, coming in third position in terms of the largest deficit in the country’s history.
According to the Treasury Department, the figure signifies an 8% increase from last year. Despite the surplus of about $64.3 billion recorded in September, it closed with a total shortfall of $1.833 trillion.
The figure represents an increase of $138 billion more than last year. 2020 and 2021 were the other two years with more deficits due to the government’s influx of cash into the economy due to the pandemic.
Interest rates continue to pile on
According to reports, the deficit cannot be chalked off to a lack of revenue as the government pulled in $4.9 trillion in receipts. However, it was unable to cover the $6.75 trillion in spending.
With spending outpacing revenue by a huge $1.83 trillion, the national debt touched $35.7 trillion at the end of the fiscal year. Notably, it is an increase of $2.3 trillion from 2023.
One major reason why the deficit increased massively was due to the interest expense on government debt. The move by the Federal Reserve to increase interest rates has caused borrowing costs to rise exponentially.
For the first time in the United States, interest expense was about $1 trillion. The government paid $1.16 trillion for interest payments on its debt. Similarly, when the figures are adjusted to remove interests generated on government investments, the way interest expense is still a record $882 billion.
The increased interest rates cost ranks third in the items on the federal budget, coming behind social security and healthcare. The average interest rate on government debts is around 3.32% this year, an increase of 2.97% from 2023.
Although September provided a little relief in terms of a surplus, it was ass result of timing quirks. The Treasury was able to move some benefit payments into August, where it witnessed the biggest month shortfall this year with a deficit of $380 billion.
Deficit continues to rise sporadically
The deficit has now grown, representing about 6% of America’s economy. Notably, it is usually high in periods of economic expansion.
According to data from the Congressional Budget Office (CBO), deficits during expansions have been around 3.7% of the economy in the last 50 years.
The CBO has also noted that the deficits are not reducing anytime soon. In their projections, it could hit $2.8 trillion by 2034, with the debt predicted to be about 122% of the GDP.
Meanwhile, investors are beginning to panic due to the development. According to a survey by Natixis Investment Managers, 68% of investors agree that public debt could put the economy at great risk.
On a larger scale, 64% of investors agree with it. The report clarified that the sentiment does not have any political sentiment. The concern over national debt would remain despite the outcome of the presidential election.
Presently, the United States’ debt is in the region of $35 trillion and it continues to rise. It is critical and inevitable that whoever wins the mantle will have to print more money.
Analysts have also clarified that investors should not only rely on stocks, especially with the equity market on the rise.
Stock investors are anticipating returns of about 15% above inflation. However, financial professionals believe that the number is not achievable, pegging the returns to around 7.1%.
In other to manage risks effectively, analysts are advising both local and international investors to diversify their portfolios to contain other assets. Concerning America’s loans, international exposure could be the solution that will prevent growth from slowing.
Taxes are another interesting topic. Historically, higher national debt has often translated to higher taxes. Consumer interests have also been on the rise with most consumers paying double-digit loans on their previous debts.